INSURANCE: WHAT HAS CHANGED DURING WAR-TIME?

Stanislav KARPOV, Counsel, co-head of Tax Disputes and Insurance Practice

After beginning of military aggression almost all spheres of life and activities had to face a necessity to solve problems at level like never before. Insurance market was not an exclusion.

Impact of war-time to effective insurance agreements

Unfortunately, any war inevitably results in demolition of constructions and other losses. In its turn, insurance is the very mechanism that, in general, aimed at indemnification of losses. Still, any rule has exceptions, and consequences of the war are not to be covered by insurance policy.

It is known, that insurance conditions of different insurance companies regarding the war can vary. The provisions of insurance agreement should be accurately analyzed in any specific situation. However, based on common business practices losses caused by the war are not to be recognized as insured accident. It worth mentioning, that cause-effect relation between military actions and losses is a key to determine whether an accident is considered to be an insured accident or not. It means that war status, as such, shall not be a ground for refusal to pay insurance indemnification.

It may be well applied to situations and accidents occurred in territories occupied after beginning of the war. In general, since 2014-year insurance agreements contain provision according to which an insurance policy covers the territory of Ukraine, except for temporarily occupied territories of Donetsk and Lugansk Regions, and Crimea. Therefore, occurrence of an insured accident in the territory occupied after 24 February 2022 shall not be a ground for refusal to pay insurance indemnification. Moreover, occupation of new territories is not to affect the validity of insurance policies in regard to insured objects located therein (if otherwise is not provided by insurance agreement).

Consequently, in the event if insured object was demolished, ruined or damaged in Kharkiv of Kherson (as an example) the refusal to pay insurance indemnification may not be based only on fact of object’s location in occupied territory or territory of military actions. The refusal to pay insurance indemnification shall be grounded upon the established fact of demolition, ruination or damage of the property particularly through the war. Within existing circumstances examining of accidents is a though challenge since active military actions can be an obstacle to inspect the object and to establish the cause of the accident.

If nature of losses expressly reveals the fact that losses indeed occurred in result of military actions, common provisions of insurance policy will not allow to receive insurance indemnification.

It worth mentioning, that there is a special coverage of war risks, which was put into practice after 2014-yaer and was applied in territories bounding to temporarily occupied territories of Donetsk and Lugansk Regions. However, due to high price such type of insurance policy has not gain a popularity, and it is used only as an exceptional case.

We believe, that all losses not indemnified under insurance policies, will be compensated at expense of reparation from Russian Federation after the victory of Ukraine.

Consequences for insurance market

The war has resulted in essential decrease of insurance companies’ cash flow as presented by insurance premiums. Some insurers have admitted over 50% decrease of cash flow.

As a counterbalance, sales of some insurance products did grow in the opening weeks of the war. It involves, first of all, tourist insurance, which affords an opportunity to get medical aid abroad in case of emergency, as well as “Green Card” insurance due to mass peoples’ migration abroad. Despite of the National Bank of Ukraine’s permission to cross the border without “Green Card” insurance policy published back on 28 February 2022, such policy was hard to be purchased in border towns due to lack of insurance policies’ forms caused by huge peoples’ request for this kind of insurance. Currently, the number of persons, moving abroad, grows down. Therefore, sales of such insurance policies revert to usual level respectively.

At this point of time, thoughts about the future of insurance market are rather pessimistic. It has to be admitted that insurance is not one of the key economic areas. Insurance may be considered more likely as a luxury, as an additional tool to minimize risks.  Obviously, after the war financial resources will be diverted to rebuild/repair pipeline and utility infrastructure, residential spaces, and factories, but not to insurance. In order to insure an object, it has to be rebuild/repaired/purchased in the first place. When financial resources are limited, money will be directed to satisfy needs of higher priority. Hence, insurance will be on second place or even farther.

Probably, some kinds of insurance, such as compulsory insurance of civil liability of owners of motor vehicles, might be not affected by the war. Since this kind of insurance is mandatory, decrease of sales level will be not that significant as for voluntary insurance.

Eventually, insurance appears to be an area that will need special attention of the state and specific measures to maintain this sphere, in particular, by means of lowering tax burden or reconsideration of regulatory requirements.